In this episode of RealPolitik, I am joined by Albert Marco, an expert on financial markets, geopolitics, and American politics. We talk about the Eurodollar system, how it works, and what it means for politics and international relations.
00:00:00.000Hello, welcome to this new episode of RealPolitik. I am your host, Firas Modad. I'm very lucky today to be joined by Albert Marco. He is an expert on financial markets, geopolitics, American politics, and a lot of other topics. Albert, thank you so much for joining us. How are you?
00:00:19.820My pleasure. My pleasure. I thought I'd benefit from your expertise and start by asking you a little bit about the Eurodollar system and how it works. Everybody's still stuck in the Petrodollar, but that's from a long-gone era. So maybe help us understand a little bit the Eurodollar, how it works, and what it means for politics and international relations.
00:00:43.760Well, like you said, the Petrodollar is more of a relic than anything else nowadays, whereas now the Eurodollar has surpassed the importance of what the Petrodollar was in the 70s. It is literally, it is the blood of the system of how the financial markets and the currency markets actually function.
00:01:06.760I mean, for instance, if Sweden and Japan wanted to do trade, interact with trade, well, it's not as simple where Sweden sends krona to Japan or Japan sends yen to Sweden and then it gets exchanged.
00:01:24.260There has to be a basis and a route for that financial settlement to actually work. And that only happens when the dollar is introduced as a basis. So you have yen converted to dollars at the New York Fed.
00:01:40.960From the New York Fed, they transmit those dollars to the Swedish, where the Swedish get their amount of settlement that they agreed on.
00:01:52.020A lot of people don't understand that without a U.S. dollar somewhere into the system, that currencies do not work. Commodities do not work.
00:02:02.260I mean, you have to have a basis of something that actually gets, you know, that there's a basis of something that actually you can trade against.
00:02:09.780There's a value set and a trade and settlement can happen according to that value.
00:02:15.400Yeah. And so when countries, when you see talk about the BRICS and you see about the talk about BRICS countries or partners of BRICS countries trying to use their own currencies in trade without utilizing the dollar, how does that fit into the system and what kinds of problems does that introduce?
00:02:38.260It doesn't fit into the system at all. I mean, the so-called BRICS currency is nothing more than a fantasy of anti-American and anti-dollar traders out there and political agents that want to sit there and undermine the system as we have now for something that simply cannot work politically.
00:02:58.060I mean, you have India, which is a big rival to the Chinese in a system as a key component of BRICS.
00:03:05.180It's like, how do you, how do you, how do you make that work?
00:03:09.100You know, you have, you have, you have many, many countries that are actually broke and have incredible debts to their GDP, three, four, 500% of their GDP.
00:03:19.200And you're talking about supplanting a system that's been around since the end of World War II.
00:03:25.420I mean, it's really a silly prospect. China really only uses BRICS as an arbitrage situation where they can sell their cheap products and get commodities or even dollars back out of the system to service their own debts.
00:03:39.380Right. And that's why you sometimes see them using the UAE as a financial center where they use the Emirati dirham, which is actually pegged to the dollar.
00:03:50.540So it ends up being that they're trading in dollars, but they're saying they aren't.
00:03:56.540And it sort of becomes a, you know, how do I, how do I get to my ear?
00:04:01.360It becomes a roundabout way of, of fixing the problem.
00:04:05.920And in terms of trading, just, you know, goods for actual commodities, there are problems with that, obviously, because the value of commodities changes quite a bit.
00:04:16.540So if you end up getting paid in coal or in oil or whatever it is, that creates all kinds of exchange risks, creates all kinds of problems.
00:04:26.240So it doesn't end up functioning in the same smooth way that the dollar provides.
00:04:30.800Yeah. There's no elasticity where the dollar can be converted into digital form, cash form, loan, so on and so forth.
00:04:38.900You can't do that with commodities. So on top of that, you have to verify commodities.
00:04:43.220So if I give you a ton of gold and say, this is what the value is, I still need to, I need to transport it.
00:04:48.680I need to secure it. I need to verify it. That takes time.
00:04:52.040And in that time, like what are the fluctuations that have happened in that, in that timeframe?
00:04:57.260So there's, there's, there's a lot of, there's a lot of problems of just having commodities as a, as a settlement procedure.
00:05:04.860And that's why you're not a big believer in gold replacing the dollar as a, as an exchange mechanism.
00:05:11.400No. Again, it comes with many, many problems.
00:05:14.540And for instance, if you're going to have a reserve asset as a new, as a global neutral reserve asset, that introduces many, many issues.
00:05:22.480I mean, if you look back historically, you'll see that the only time in history that you have a neutral reserve asset is in terms of multipolarity.
00:05:32.220Well, multipolarity will end up leading into world wars because there has to be a hierarchy of nations and trade and militaries.
00:05:41.160It's just the way nature works. I mean, people are trying to fight for so long, but you know, nature supersedes everything else.
00:05:48.060No matter if you believe in it or not, it's just the way things happen.
00:05:52.480And for, for gold to be such, for gold to surpass the dollar, you would have to have many, many nations on equal economic footing, on equal military footing.
00:06:03.680And we are at least a hundred to 200 years away from such a, such an event.
00:06:10.140I'm, I'm going to pick up on that, um, multipolarity and whether or not we're heading towards multipolarity in, in a little bit down the line in the conversation.
00:06:18.720Um, so with, with, with that in mind, uh, walk me through a little bit, the role of currency swaps and how the federal reserve stabilizes the global financial system.
00:06:31.780Um, every single crisis we see, there are these massive, um, swaps that happen between the federal reserves and the world central banks.
00:06:40.680Um, walk me through what that means and what it implies for the system and how it works.
00:06:47.480Well, well, let's, let's take as an example, the ECB, which is probably the biggest benefactor of a swap lines from the fed.
00:06:56.380So the ECB gets dollars into their system, right? Euro dollars, right?
00:07:02.120And that's what, that's basically, they need a, they need a certain percentage of dollars in their system behind the Euro to stop hyperinflation.
00:07:09.940So what they do is they get dollars and then they take those dollars, they lend it out to their other banks within the year, European union.
00:07:16.880Well, those banks lend it out to localized banks.
00:07:19.400So by the time you get to the localized banks and they start producing loans for their clients, you're talking about 10 to 15 times multiple of $1, right?
00:07:31.080So in, in times of economic strife, like we had in 2012, you have non-performing loans starting to cascade back onto the central banks, right?
00:07:40.540Making them insolvent basically, right?
00:07:43.200You know, you lend out $1 billion, well, $15 billion is coming back and you only have a billion dollars to back it up in your bank.
00:07:54.100So the fed has to step in these situations and send over more dollars to be able to combat those MPLs, non-performing loans, right?
00:08:05.100Otherwise, the system gets out of whack and hyperinflation takes place.
00:08:09.160And, you know, as you can see what happened in Zimbabwe, the same could happen to the European Union.
00:08:14.100Although I'm, I'm making an extraordinary case in such a, such an event, but I'm doing it.
00:08:19.700So I'm doing it specifically so people understand that without dollars at the, at the very base of the central banks, hyperinflation takes over.
00:08:28.260Right. And this goes down to the way that money is created in the system.
00:08:34.100Money is loaned and then multiples of that money is loaned and then further mult, so basically each dollar generated by the Federal Reserve becomes, by the time it reaches the recipients, 15, 20, many, many more multiples of the original dollar.
00:08:54.700So, so walk me through, um, walk me through this sort of, um, the influence that comes, that accrues to the United States as a result of how this operates.
00:09:10.040What happens if the U.S. decides, uh, we're not going to give you any dollars?
00:09:14.060Well, uh, you know, I have been a big proponent of such a, such an event to, uh, pressure a lot of the allies and adversaries and, you know, say, well, you're not going to get us dollars this time because, you know, it's beneficial to the United States because we get trade, we get trade, better trade deals, right?
00:09:32.340We get better geopolitical leverage when needed, specifically with the European Union.
00:09:39.560Uh, sometimes with Asia, I mean, the Chinese have been wise to the game where they've been arbitraging gold and commodities to offset that.
00:09:49.860But, you know, again, at the end of the day, they still have to buy treasuries through proxies in the Caymans or Belgium to, uh, accumulate dollars for the system.
00:09:59.060So, they have to, they have to, um, abide by certain, like, mathematic principles.
00:10:21.600I mean, the United States is the one that's swallowing all the deficits for, to enable trade to function globally.
00:10:26.360I mean, there's, you know, uh, you have a lot of Americans that are, uh, opposed to this because they don't quite understand that without this system, without the system in place, that, you know, trade globally just stops.
00:10:39.900And that affects not just the world, but affects the United States back at home because, you know, we don't, we don't make very many things on shore anymore.
00:10:50.320And so, with Trump trying to fix trade, to get better trade deals, to reduce the deficit, what does this do to the system?
00:10:57.960Well, you know, that's really difficult to say because I don't think that Trump's tariff, uh, tariff plans are about really lowering the deficit and whatnot, but more about offsetting, uh, future spending.
00:11:13.380So the tariffs that, that, uh, Trump introduced were nothing more, in my opinion, than, uh, generating revenue to be able to offset, uh, his tax cuts for the incoming, for the coming fall.
00:11:26.360You saw that big, beautiful bill that he keeps mentioning.
00:11:29.740Um, you know, there has to be offsetting, offsetting costs.
00:11:34.160And the only way that the United States government can actually get that, make that work is with this tariff revenue.
00:11:40.180Although the legality of that is quite questionable.
00:11:43.360It's actually a gray area because normally they're not allowed to do such a thing.
00:11:48.000But in the past couple of years, since Biden's been in office, I mean, 50, 60% of the American public have been in a recession.
00:11:56.540So the government, government revenue has been, uh, quite damaged with that.
00:12:01.580This is, this is probably the reason that the Trump tariffs were enacted to begin with.
00:12:07.240So we heard from Biden and from Trump that the objective is to get the United States to re-industrialize and to re-shore a lot of industry into the United States because that's necessary for American jobs.
00:12:22.780That's necessary for the well-being of the average American taxpayer.
00:12:27.280Um, this seems to, to clash with the nature of the financial system and how the financial system works.
00:12:33.740Yeah, I mean, I mean, it's, it's a good story for the, for, for elections, but the reality is such an event would be so drastic and it would take, you know, 10, 20 years to actually see fruits of such, such policies, uh, come about that.
00:12:53.080I mean, sure, we can have a few auto jobs, you know, auto industry jobs come over to the United States just because of the tariffs and whatnot, but those are few and far between.
00:13:02.240You're talking about maybe 50, 100,000 jobs total, right?
00:13:05.940I mean, what, what, what do they really expect?
00:13:08.180I mean, they're, they're, they say that they want, you know, new industries and new factories popping up in the United States.
00:13:14.260Those are, those are, those are, you know, billion plus dollar investments that take, you know, a decade to, to materialize.
00:13:21.820It's just, it's just not, not, it's not as simple as, you know, saying this is what we're going to do and it happened a year later.
00:13:31.580So what do you think he's trying to do?
00:13:33.220Just do you, do you think Trump is sincere about this or do you think that he's just be using the cynically or do you think that he doesn't understand the system?
00:13:39.420I just don't, I think that he doesn't understand the system, right?
00:13:42.640You know, I think that he, initially he was, he was sincere in his motives, but once, once Besant and other people got involved and actually described what, what, what it is, what, what goes on in the financial system.
00:13:58.220I think that at this point, it's more about, it's more about creating a narrative on the markets and the, and the U.S. economy more so than actually producing anything on shore.
00:14:24.100Because setting up these factories takes, you know, five years, 10 years for it to actually become functional and productive, for it to actually transform things.
00:14:33.440And therefore, this is a marathon if it is to be done at all.
00:14:39.040And if it is to succeed, it will come at the cost of breaking the financial system as we know it.
00:14:45.900And on top of that, you have regulations in the United States that makes things costly.
00:14:49.240Like the EPA, the Environmental Protection Agency has, you know, a lot of regulations.
00:14:54.400So whenever you start building a factory or have these plans to do so, you have to go through a gauntlet of regulations on top, before you even start breaking ground and building a factory.
00:15:04.800So, you know, the reality is, you know, you're talking about two, three years of just, you know, legal work before a shovel hits the ground.
00:15:19.520You've always mentioned that the Federal Reserve manipulates the markets and the Federal Reserve has a massive influence on the S&P 500 and sometimes on specific shares.
00:15:31.640Could you help us understand this a little bit better?
00:15:34.580I'm not sure I've personally understood it very well.
00:15:44.560Like, for instance, Yellen would use proxies.
00:15:47.080And when I mean, say proxies, I mean other hedge funds, other sovereign wealth funds like the Norwegians, which is a big one, to pump the market.
00:15:56.560So they'd, you know, buy a lot of shares of certain stocks, which mostly would have been the MAG-7, the tech stocks, because they're the easiest to move.
00:16:08.120And then on the other side, the Federal Reserve, when they want to lower the price of oil, for instance, because that helps tech stocks and bonds, it's tied in a web.
00:16:19.640They have a trade desk with about 200 people that they can just start selling contracts on the futures market until the price of oil goes down, right?
00:16:27.840And I get into many arguments with people.
00:16:32.160They're like, oh, they can't be doing this.
00:16:33.580I'm like, why can't they be doing this?
00:17:24.980You know, although the president appoints a chairman, he doesn't really work for the president anymore.
00:17:29.420He doesn't have to listen to the president.
00:17:30.600He can't even get fired from the president.
00:17:32.860But that's why whenever Trump comes out there and says, I'm going to fire Jerome Powell or so on and so forth, nobody really believes it because he knows he can't do it.
00:17:40.880How does that mix with democracy and institutions and elections?
00:17:47.520So you're talking about a system that's the reserve currency, right?
00:17:53.620You have to have such safeguards because if there's a problem in the system where markets are crashing and so on, price of oil is going to 200, so on and so forth, you need safeguards.
00:18:04.640You cannot allow such thing to happen because governments will fall.
00:18:17.900But unfortunately, it happened under Biden many times and quite a few of the elites in Wall Street were actually really, really upset about it.
00:18:30.300And that's why you saw a few of them flip over to Trump for the election.
00:18:34.620And there's no way to sort of hold Jerome Powell accountable for that kind of thing or to sort of say, don't you dare do this again or don't do this next time or anything of that sort?
00:18:44.320No, because if you sit there and admit it, so if Trump comes out and says that, you know, they start admitting to manipulation of the markets, it would throw the global markets in a tizzy.
00:18:55.760I don't even know what would happen or how much trust would be lost in the system, right?
00:19:00.960This is like, these are like phantom accounts that are supposed to be safeguards.
00:19:05.780Everybody on a certain level knows these things exist, but they don't really want to believe they exist and especially politicize this as much as it's been.